Leftist Tax Policy: Shoot at the Rich, Wound the Poor

I sometimes wonder if their real motive is to penalize success and punish the “rich,” but let’s be charitable and assume that many of them truly wish to help the poor.

That’s a noble sentiment, to be sure, but this is why it’s also important to look at the consequences of policy, not just the intentions.

I explained last year that certain left-wing fiscal, regulatory, and monetary policies actually harm the poor and help the rich, and I augmented that analysis earlier this year by showing how farm policies line the pockets of upper-income people.

Let’s now add to this research by looking at a new study (h/t: Tyler Cowen) from Mario Alloza of University College London. Here are some of the key findings from the study’s abstract.

Household panel…between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. …higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. …the effect of taxes on income mobility…is particularly significant when considering mobility at the bottom of the distribution.

And here are some of the findings from the study.

…to the extent that income mobility is a desirable feature of an economy, it is then relevant to consider how fiscal policy may affect it. …The results obtained suggest that higher marginal tax rates reduce income mobility. Particularly, I find that an increase of one percentage point in the marginal rate is associated with declines of about 0.5-1.3% in the probability of changing deciles of income. …The economic mechanism that induces this impact seems to be related to the labour market incentives created by changes in the tax schedule. …While some studies have pointed out to the importance of progressive taxation in addressing inequality, the results from this paper suggest that such changes may have a detrimental impact on income mobility.

Not surprisingly, it turns out that marginal tax rates are the most important variable, as we learned in our discussion of Cam Newton’s (fiscally) disastrous Super Bowl.

The effect of a percentage point reduction in marginal tax rates fosters relative income mobility across deciles…by about 1%. Similarly, households are about 6% more likely to stay in the same quintile of income when the marginal tax rates goes up by one percentage point… This evidence suggests that the economic mechanism that determines the effect of taxes on income mobility is based on incentives.

And here are more details on how higher tax rates appear to disproportionately harm the less skilled, while lower tax rates are more likely to help.

…non-college are, on average, more likely to move down in the income distribution, while college households are likely to move up (or, at least, less likely to move down) as a result of an increase in the marginal tax rates. …Fiscal reforms that homogeneously reduce marginal tax rates seem to contribute to income mobility by making households with non-college education more likely to occupy relatively higher positions within the income distribution (and vice versa for college-graduated households).

The bottom line is that some of our friends on the left want to shoot at the rich, but they wind up wounding the poor instead by greasing the rungs on the ladder of economic opportunity.

Which is why, for the umpteenth time, I’ll emphasize that market-driven growth is the moral and practical way to help the less fortunate.

P.S. Here’s an update on my travels. I’m in Beijing for a couple of speeches and I probably should say something substantive about how genuine federalism is an ideal long-run outcome for China, Hong Kong, Macau, and Taiwan. They can all be one country, if that’s what everyone wants (and that’s already the case for China, Hong Kong, and Macau), but that doesn’t mean there’s a need for a one-size–fits-all approach to domestic policy. In other words, a version of the advice I offered on Ukraine,Scotland, and Belgium basically applies in this part of the world as well. Call it one nation with three or four systems.

But the most memorable part of the trip (in a bad way) is that my communication lines with the world have been severed. The problem started when I left my phone in an airport security scanner on my way from Cambodia to Hong Kong.

Then I get to China and I learn that my laptop can’t access either the Cato remote desktop or my Gmail account. Or Twitter. Or Facebook.

This is a not a trivial problem since I got to Beijing in the evening, had a speech in the morning, but couldn’t access any of the information (and I’m not organized enough to print things out ahead of time). I eventually figure out a solution for my morning event by asking the front desk to connect me with the person who made the room reservation, which eventually leads to me getting in contact with someone else in the hotel who is there for the same event.

But that’s only part of the story. I still haven’t had email for several days. And I obviously don’t have a phone, either. So while I’m able to access a lot of stuff on the Internet using my laptop, I’m in the dark about what’s happening at Cato or what’s happening in the rest of my life. By the way, if you’re asking why I don’t create a new email address, that’s not as easy as it sounds since the widely-used email sites have security features such as asking to send you a text to confirm your new account, something that obviously wouldn’t work for me.

Oh, and I’m not able to access my blog while in China. So to maintain my pattern of producing a column every single day for however many years, I had to create a word document and then randomly approach someone in the hotel restaurant to ask if he could upload my column from a thumb drive and email it to friends back in Washington.

Oh well, nobody said the fight for liberty was easy.

P.P.S. Now that I’m done whining, let’s return to our original topic and look at a cartoon showing what Obama wants.

But then let’s look at what Obama has actually delivered, which sort of confirms the research discussed above.

[…] Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe additional income for the rich means less income for the poor. […]

[…] Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the poor. […]

[…] Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the poor. […]

[…] Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the poor. […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to […]

[…] As he points out (and as captured by the semi-clever nearby image), this is mostly a term used by leftiststo imply that supporters of economic liberty want tax cuts for the “rich” based on a theory that […]

What people may resent, which is more understandable, is being unequally lucky.

But when reward is based primarily on competence, hard work, good life planning, and the patience of delayed gratification (as it would be in a free non coercively collectivist society) then most of my hesitation vanishes.

But wouldn’t I rather have people of higher competence, harder work, better life planning, offer me the fruits of their work in a more bee-like solidarity moral framework? Yes, I would, but such a human ant has not been genetically engineered yet. The same leftist who preaches socialism drinking Martini at the party will cut you off on the road minutes later, or honk at you when you drive fast by him on your way to seeing an injured or sick child at the hospital.

But perhaps more importantly the reality verdict evolution is unequivocal. Coercively collectivist societies dampen aggregate motivation and grow much slower. The simple arithmetic compounding of exponents takes care of the rest, leaving you ever further behind in deterministic decline.

Humans cannot become forcibly compassionate towards distant unknowns (at least not to the tune of the 30-50% contributions implied by taxation). At the same time, people are attracted to coercive collectivism. This eternal battle keeps going on, and few societies escape decline. Crowds will keep imposing coercive collectivism and dampening motivation and growth. The few societies that escape this dominant tendency rise to the top of the prosperity rankings.

The very term “less fortunate” is relative. The “Less fortunate” are only so in comparison to the more fortunate (more competent, harder working etc). So if you take away fortune from the more fortunate, the ranking of the less fortunate increases, since the overall relative metrics of poverty also decrease.

Leftists are more concerned about current wealth variations rather than absolute wealth evolution through the ages. That is why in their forced, more equal, and slower growing world, they will have to wait until, say, 2080 for a cancer cure, rather than, say, 2060. Those who die from cancer between 2060 and 2080 will be sacrificed to the idea of more feel-good current equality.

As a matter of fact, had the world been freer for even just the last two centuries, growth would have been higher, and 2080 may be… today! In other words, we would quite likely have already discovered the cure for cancer. In that sense everybody who will die of cancer in the next few decades, is, to a large extent, a victim of coercive collectivism past.

Humans have many suicidal tendencies. But in coercive collectivism, not participating in the slow growth world is just not an option. In pitchfork democracy you are drafted into the master plan, whether you believe in it or not.

So from your description, liberal policies are a complete success. The goal is not to make everyone rich, but to make everyone equal. If that means equally poor, that’s fine, as long as they’re equal.

I heard a lecture once where the speaker asked the audience, Suppose a genie appeared and offered you a choice. Either (a) 10% of the people in your town each get $1 million and the other 90% each get $10,000; or (b) everyone gets nothing. Everyone gets the same non-zero amount is not an option. The speaker asked for a show of hands, and a majority choose (b).

I found this unbelievable, so the next day I asked my co-workers. One hundred percent of them, every single one, chose (b). They said that it’s better for everyone to get nothing than for some to get more than others, because that wouldn’t be fair. I was amazed. I asked what seemed the obvious question: Wouldn’t it be better to get $10,000 rather than nothing, regardless of how much others got? No, everyone else agreed. It is more important for it to be fair.

Regardless of who pays what marginal taxes on income, it is the consumer who ultimately pays the tax, rich or poor.

For example, if you removed all taxes from the cost of a product (cost should include some net profit); it is easy to see the impact of different tax levels on the cost of the product:

If cost is $1.00, and embedded tax is 25% of final cost, price must be $1.33.
If cost is $1.00, and embedded tax is 50% of final cost, price must be $2.00.

Therefore, if you add taxes only on incomes of the “greedy” rich or “evil” corporations and it raises the total taxes paid, the burden falls on rich and poor alike in the prices they must pay for the product or service.